Fitch Affirms Russia's Belgorod Region at 'BB'; Outlook Stable
02 Dec 2016 12:10 PM
Fitch Ratings-Moscow-02 December 2016: Fitch Ratings has affirmed the Russian Belgorod Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB', Short-Term Foreign Currency IDR at 'B' and National Long-Term Rating at 'AA-(rus)'. The Outlooks on the Long-Term IDRs and National rating are Stable.
The region's outstanding senior unsecured domestic bonds have been affirmed at 'BB' and 'AA-(rus)'.
The affirmation reflects the region's stable fiscal performance, moderate, albeit growing, direct risk and contingent liabilities, amid a prolonged economic slowdown in Russia.
KEY RATING DRIVERS
The 'BB' ratings reflect the region's sound operating performance, moderate direct debt and a well-diversified economy. The ratings also take into account the region's exposure to contingent risk as well as the recessionary domestic environment and a weak institutional framework in Russia, which in turn negatively influences the region's credit metrics.
Fitch expects the region to maintain stable fiscal performance with an operating margin of about 8%-10% in 2016-2018 (9M16: 8.7%). This will be supported by expected moderate growth of tax revenue and current transfers, along with continuing control on operating expenditure. Fitch projects average operating expenditure growth to remain close to 4% in 2016-2018 (2014-2015: average 3.4%).
Belgorod's interim deficit before debt variation widened to 7.7% of total revenue at end- September 2016, from 3.5% in 2015. The larger projected deficit is attributed to capex funding needs, as the region continues to invest in roads and development of logistics and transport services. Financing flexibility remains limited with the region having already cut back capital outlays twofold to 11.7% of total spending over 2011-2015. In our view, the region's deficit is likely to widen further to 5%-7% in 2016-2017, which will lead to debt financing.
Fitch projects moderate growth of the region's direct risk up to 60% of current revenue in 2016-2018 (2015: 52.2%). Belgorod's debt stock as of 1 October 2016 comprised domestic bonds (55%), budget loans (30%) and bank loans (15%). Fitch views the RUB4.9bn loan at the region's public company Obldorsnab as direct risk as Belgorod provides the company with subsidies to cover principal and interest repayments on this loan.
We view Belgorod's exposure to refinancing risk as limited, with 12% of currently outstanding debt scheduled for repayments in 2016. The region's interim liquidity position was satisfactory with RUB3.5bn cash held on accounts as of 1 October 2016 (2015: RUB4.3bn), while its average monthly cash balance in 2016 stood at RUB3.9bn.
We project the region's net overall risk to grow gradually before stabilising at below 80% of current revenue in 2016-2018 (2015: 67%). The region's contingent risk stems mostly from guarantees, which decreased to RUB6.9bn at end-9M16 (2015: RUB9.7bn). The region issues guarantees in support of several companies, largely operating in agriculture. Debt at Belgorod's public sector entities stabilised at RUB3.8bn in 2014-2015.
Russia's institutional framework for sub-nationals is a constraint on the region's ratings. Frequent changes in both the allocation of revenue sources and the assignment of expenditure responsibilities between the tiers of government limit Belgorod's forecasting ability and negatively affect the region's strategic planning, and debt and investment management
The region's administration projects continued economic growth of 3%-5% per annum in 2016-2018. The region's gross regional product (GRP) expanded 2.2% in 2015 (2013-2014: 3%), according to the administration's preliminary estimates, outpacing Russia's broader economy, which contracted 3.7%.
An improved national economy leading to a sustainable operating balance and debt coverage in line with the region's average maturity profile (2015: three years and six months) could result in an upgrade.
Growth in direct risk to above 70% of current revenue, coupled with close to a zero current margin, could lead to a downgrade.
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Fitch has made a number of adjustments to the official accounts in to make local and regional governments comparable internationally for analysis purposes. These adjustments include:
- Transfers of capital nature received were re-classified from operating revenue to capital revenue;
- Transfers of capital nature disbursed were re-classified from operating expenditure to capital expenditure.
Additional information is available on www.fitchratings.com
International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)
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